3 Simple Steps to Wholesale Real Estate
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Real estate wholesale is one of the easiest ways to start your career as a real estate investor. You can start with limited real estate knowledge and, with advances in technology, go wholesale to virtually anywhere.
So what is wholesale and what do wholesalers actually do?
As a wholesaler, your goal is to find a motivated seller and negotiate a low price for their home. Once you have a sales contract between you and the homeowner, try to sell that contract to an “end buyer”. The final buyer or cash buyer is the investor who ultimately closes the property.
There are three basic steps to all wholesale transactions.
1. Find a motivated salesperson
The first step is for the wholesaler to find a homeowner who is motivated to sell their home. Motivation is a key element in the wholesale process as it enables the wholesaler to negotiate a great price for the home. This is imperative as the whole wholesale process depends on the wholesaler selling the house to a cash buyer at a discount from the current market value. The wholesaler needs to negotiate a good enough deal to add his profit to the price and still sell it as a discounted property to an end buyer.
Finding a motivated salesperson can be a difficult task. Usually this requires a calculated marketing campaign that focuses on a variety of problems that a quick sale would solve. For example, a wholesaler may target homes that are inherited and in need of major repairs. These particular homeowners would not necessarily be able to sell that type of home on the open market. Most retail buyers aren’t looking for homes in need of repair, and most banks don’t loan out this type of home – making it a perfect home for a wholesaler.
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2. Negotiate the deal
In the second step, the wholesaler negotiates a purchase price with the homeowner. Not only can the supply be low enough for the wholesaler to sell to an end customer, but money must be added to make a profit. Here is an example of a wholesaler offering:
Let’s say the current market value for a “turnkey” home (ready to move in, no upgrade required) is $ 200,000.
A wholesaler would have to calculate the repair, conversion and refurbishment costs as well as the transaction costs (closing costs, etc.). They would also need to factor in their profit and the potential profits of the investor.
The process can look like this:
- $ 200,000 market value
- $ 40,000 rehab, transaction, etc.
- $ 40,000 in profit for the final buyer after rehab
- $ 5,000 in profit for wholesalers
- $ 115,000 may be the offer that the wholesaler makes to the seller.
If the seller agreed to a $ 115,000 offer, the wholesaler would attempt to sell the home to a cash buyer for $ 120,000. If successful, the wholesaler would make a profit of $ 5,000.
This example is a very simplified version of the calculations required to create a quote. However, it is intended to help you understand the process.
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3. Find a cash or end buyer
In the third step, the wholesaler has to find a cash buyer – also known as the “end buyer” – for his business. As a wholesaler, you have no intention of closing the deal. Your job is to sign the property and sell it to an end buyer. An end buyer or cash buyer is the investor who completes and finances the transaction. The reason they are called cash buyers is because they need to be able to buy the house with cash. This avoids the involvement of a financial institution in the transaction.
When a financial institution is involved (e.g. a bank or credit union) there are several requirements to the credit process. Estimates and inspections are required in order to obtain a home purchase loan. Most financial institutions don’t lend to homes that require major repairs. To avoid problems, wholesalers only sell houses to cash buyers.
Take that away
Many very successful real estate investors started out as wholesalers. As a wholesaler, you can learn how to invest in real estate with very little liability in transactions. This is important for newcomers, because simple mistakes can be very expensive. The wholesale process gives you the opportunity to learn while you earn.
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